Property prices to stabilize in near term but correction may begin in 2019

Property
sales in August fell by as much as 26.8% from the end of Q2, as the market
faced growing uncertainties amid rising interest rates, growing trade tensions
and the new vacancy tax, a new Cushman & Wakefield report says

Price
growth will remain at around 15% for mass residential for the entire 2018, but a
correction of up to 10% may happen in 2019 should the impact of the
uncertainties worsen

Investors
became more prudent in Q3, resulting in fewer and slower sales.

HONG KONG,
CHINA - Media OutReach - 13 September 2018-Cushman & Wakefield, a global leader in commercial real estate
services, noted a change in momentum in the residential and property investment
markets in Q3, as the property transaction volume dropped in the face of
growing headwinds due to rising interest rates, China-U.S. trade tensions and local
government policies. Although property prices are
not expected to drop significantly in the near term, should the above factors,
especially the on-going trade tensions, impact the local economy, a price
correction will likely begin in 2019.

At 48,431 S&Ps
(Property Sales and Purchase Agreements), the first half of 2018 recorded the
highest H1 transaction volume since 2012 (56,047 S&Ps), as the market
seemed to have grown accustomed to the policy factors during the past six years
and performed robustly under strong fundamentals. However, since the U.S. and
China began to cross swords over bilateral trade in June, local property
transactions fell from a high of 9,520 S&Ps in June - the highest level
since September 2016 - to 8,796 in July and further to 6,966 in August, with a
drop as much as 26.8%.

Mr Alva To, Cushman & Wakefield's Vice
President, Greater China & Head of Consulting, Greater China commented, "Sales volume will
drop further in September and should stay at 5,500 S&Ps on average per
month for Q4."

Despite falling sales, home prices continued
to grow but the rate of increase has slowed. As of September, the price of representative
estatessuch as City One Shatin and TaikooShing went up
by 16.1% and 18% YTD respectively, while increases of 15.7% in Residence
Bel-Air and 12.4% in The Harbourside were recorded.

In fact, according
to the Hong Kong Residential Market - Gathering Storm Clouds? report
launched by Cushman & Wakefield today, apart from trade tensions, rates
hikes and a new government measure in the form of vacancy tax are also playing
into blurring the outlook of the primary sales market for the remainder of 2018
and into 2019. Mr Reed Hatcher, Cushman &
Wakefield's Director and Head of Research Hong Kong and author of the report, explained
the implications:

Rising
interest rates

The rise in borrowing costs may not affect overall housing
prices initially. However, home prices may come under pressure if a 100bps
mortgage rate hike is assumed by the end of 2019,
as the increase in monthly mortgage payments will push affordability ratios up
and result in more buyers failing the stress test, which in turn could reduce
transaction volumes and cool investment sentiment.

Growing
trade tensions

The China-U.S. trade tensions is likely, in the first instance, to
affect the local trade and logistics sector, which accounted for 22% of Hong Kong's
GDP and one-fifth of the labor workforce as of
2016. Although the HKSAR government has previously estimated that the trade tensions could drive GDP down by 0.1 to 0.2 percentage points over the
near term, the longer
term impact could be more severe if the situation worsens.Meanwhile,
resulting weakness in the RMB could dampen mainland
Chinese buying power for Hong Kong homes, while the struggles
in the stock market could impact the buying sentiment.

The
vacancy tax

The current supply of unsold units (around
9,000 units in H1 2018 according to the Buildings Department) is unlikely to provide
relief to the overall market. Even if the tax will accelerate the sale of mass
residential units, the supply in the near term are insufficient to
dampen the market. However, the tax may prompt a change in pricing strategies
as developers may push to obtain pre-sale approval for projects -- of more than 15,000 units that have commenced construction in 2016 or before -- in
a bid to avoid the vacancy tax.

Mr
Hatcher commented, "Under the above three
factors, more potential home buyers will adopt a wait-and-see approach amid
rising uncertainties and transaction volumes are expected to fall in the
remainder of 2018. On the other hand, limited supply and some pent-up demand
will continue to support home prices, and they are expected to be fairly stable
through year end."

Mr
To added, "However, we may see a price
correction in 2019 if the current trade tensions escalate into a full-blown
trade war, given the strong economic ties between Hong Kong and the Mainland.
The slowdown in the Mainland economy will dampen purchase sentiment and weigh
on local home prices, which could drop as much as 10% - a range that depends heavily on how the trade war pans out."

As in the
residential market, the property
investment market lost a bit of momentum in Q3, which recorded only 64 major transactions (each with a consideration of over HK$100
million) so far in the
quarter. Although around 80 major deals are expected by the end of September,
it reached just half the transaction volume in Q2, which showed that investors
were also growing wary of the potential impact of approaching headwinds on the
residential market, resulting in fewer and slower sales.

The total consideration recorded in Q3 so far
was HK$37.8 billion, just more than half the considerations in Q2. Mr Tom Ko, Cushman & Wakefield's
Executive Director, Capital Markets in Hong Kong, commented, "The unit
rate of investment class assets is still stable. The market saw no panic sales,
but buyers, especially seasoned investors, became more prudent."

Albeit with fewer transactions, lesser considerations
and smaller average deal sizes, the distribution pattern of capital in Q3 was
similar to that in Q2, which was again dominated by a preference for luxury
residential. Notable transactions in the quarter included two en-bloc office
deals (8 Observatory Road & Octa Tower) showing that office pricing remains
firm and is able to withstand the change in the market sentiment due to the
continued positive outlook for the sector.

Mr Ko said, "The on-going trade tensions will bring
about the biggest uncertainty to the property market. Should the tensions
escalate, the investment market will see a bigger drop in transaction volumes
than the residential market, as seasoned investors are generally more sensitive
to the change in international and domestic factors. However, if the current
circumstances remain unchanged until year end, we still believe the transaction
volume and considerations for the whole year will surpass the record of 2017,
and developments in Q4 will provide more clues for an outlook of the market in
2019."

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global real estate
services firm that delivers exceptional value by putting ideas into action for
real estate occupiers and owners. Cushman & Wakefield is among the largest
real estate services firms with 48,000 employees in approximately 400 offices
and 70 countries. Across Greater China, there are 20 offices servicing the
local market. The company won four top awards in the Euromoney Survey 2017 in categories of Overall, Valuation,
Agency Letting/Sales and
Research in China. In 2017, the firm had revenue of $6.9 billion across core
services of property, facilities and project management, leasing, capital
markets, advisory and other services. To learn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com.hk or follow us on
LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china)